Optimal currency carry trade strategies Articles uri icon

authors

  • LABORDA HERRERO, JUAN
  • LABORDA HERRERO, RICARDO
  • OLMO, JOSÉ

publication date

  • March 2014

start page

  • 52

end page

  • 66

volume

  • 33

International Standard Serial Number (ISSN)

  • 1059-0560

Electronic International Standard Serial Number (EISSN)

  • 1873-8036

abstract

  • This paper studies the optimal asset allocation problem of an investor with a portfolio given by the U.S. risk-free asset and a carry trade benchmark comprising the currencies of the G10 countries. Our optimal strategy is able to adapt to macroeconomic conditions and avoid the so-called crash risk inherent in standard carry trade strategies by constructing a vector of dynamic weights that depends on a set of state variables. We find that the U.S. Ted spread, the U.S. average forward discount, the CRB Industrial return, and a global monetary policy indicator are the key drivers of optimal currency carry trade strategies.

subjects

  • Business

keywords

  • currency carry trade; uncovered interest parity; crb industrial return; monetary policy; optimal parametric portfolio